Foreign institutions have significantly sold off Chinese bonds. Is the renminbi bond no longer popular?

The latest data from the central bank shows that the bond balance held by overseas institutions in the interbank bond market is currently 3.2 trillion yuan, down from 3.28 trillion yuan to the current 3.20 trillion yuan, a reduction of 80 billion yuan.

Overseas institutions sold off 80 billion yuan worth of Chinese bonds, but the funds do not seem to have flowed back to the US market, raising a new question.

What is the current global capital flow like?

01. Selling Chinese bonds

After analyzing the data from the China Bond Registration Center, foreign financial media found that recently, foreign institutions have reduced their holdings of Chinese government bonds by more than 65 billion yuan, and also reduced their holdings in banks by nearly 18 billion yuan, totaling more than 80 billion yuan.

Some analysts point out that this may be related to the unexpected continued interest rate hikes by the Federal Reserve.

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In the case of bank bankruptcies in the United States, the Federal Reserve actually raised interest rates by 25 basis points in March, and the inflation data during this period shows that the effect of controlling inflation is not obvious, so the Federal Reserve may continue to raise interest rates in May.

At the same time, China implemented a 0.25% reserve requirement ratio reduction, which means that the future LPR may decline, and the overall interest rate environment will continue to decrease.

Between the rise and fall, the interest rate difference between China and the United States has become larger, so selling Chinese bonds and buying US bonds seems to be a good choice.02, The Issue with the United States

However, this is merely a theoretical choice; when foreign institutions truly consider their options, they won't focus solely on interest rate differentials. The current economic environment in the United States might be more deserving of attention.

Bank financial reports that have been released and those that are about to be released will provide many valuable clues.

Just looking at the three major American banks—Bank of America, Wells Fargo, and JPMorgan Chase—we can see that their deposit balances have already decreased by $521 billion by the end of this quarter.

The reason for the outflow of deposits from several large banks is that bank depositors have withdrawn their funds from banks and invested them in money market funds, as money market funds can generate greater returns compared to bank deposits.

If banks cannot provide a satisfactory response to the issue of bank deposits, then their financial reports will have significant problems and lead to severe consequences.

Moreover, in the financial reports, the net interest margin will also attract more attention.

In April, people's focus on the financial reports of major banks is no longer solely on the data; they will pay more attention to the banks' future expectations based on the reports. According to these expectations, the earnings per share (EPS) of the six major Wall Street banks in the U.S. stock market have all declined, with a drop of about 10% per share.

In 2022, it was mainly technology stocks that fell; if the financial sector begins to decline in 2023, it is believed that it will quickly lead to other industry sectors. This also indicates that the United States' entry into recession has become inevitable.

It is hard to imagine that under these circumstances, funds would be invested in the U.S. stock market or bond market.03, Has not flowed out of China

In fact, we can also analyze from another perspective. If funds only choose to invest in government bonds, which is more worth investing in, U.S. Treasury bonds or Chinese government bonds?

Looking at the yield alone, U.S. Treasury bonds have a higher yield, which is related to interest rate hikes and also to the significant drop in U.S. bonds. However, when considering inflation, the return on investing in U.S. bonds is still far lower than the devaluation caused by inflation, so the actual yield of holding U.S. bonds is negative.

Moreover, one must consider that the U.S. dollar is in a declining trend. For funds from other countries, exchanging their currency for U.S. dollars to purchase U.S. bonds, and then selling U.S. dollars to exchange back into their own currency in the future, would also have to bear the additional loss due to the depreciation of the U.S. dollar.

On the contrary, China has relatively low inflation, and purchasing Chinese government bonds can yield real returns. At the same time, the Chinese yuan is appreciating, and purchasing yuan-denominated bonds can also gain additional returns from the appreciation of the exchange rate.

Clearly, overseas funds should opt for Chinese government bonds.

The selling of Chinese bonds this year is likely not due to capital flowing back to the United States, but rather because funds are shifting from bonds to the stock market, and these funds have not flowed out of the Chinese market.

After the pandemic, China's economy began to recover and develop, and the stock market was relatively low. Therefore, a large amount of foreign capital has been continuously flowing into A-shares.

At the same time, institutions that originally held yuan bonds are very likely to choose to shift their funds from bonds to stock investments.This can also explain why, after foreign capital sold off RMB bonds, the funds in the United States continued to flow out instead of inflow.